Wm. Morrison Supermarkets plc: Watch A Falling Knife

Wm. Morrison Supermarkets plc (LON:MRW) has had a torrid time.

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morrisonsMany companies have what I call a Wile E. Coyote moment. As the company grows, and profits grow, the share price pushes higher. This growth phase of a company can last for years. As confidence increases, and more investors buy into the story, the share price just keeps increasing.

But, at some point the growth phase ends. The share keeps on rising, until investors notice that profits have started to fall. And then the share price tumbles.

A retailing landscape in the midst of dramatic change

This is what is happening with supermarket chain Morrisons (LSE: MRW). After two decades of expansion, this company is finding that it is reaching the limits of its growth.

What’s more, this is happening at a time when supermarkets in the UK are finding life increasingly difficult, with strong competition from discounters such as Aldi and Lidl, and premium stores such as Waitrose and Marks & Spencer. The landscape of retailing in this country is in the midst of dramatic change — change that most people, including myself, have underestimated.

In investing parlance we often talk about catching a falling knife. In the case of Morrisons, the knife is still falling.

What should investors be doing? Well, investors should have headed for the exit doors months ago. If you have not yet invested in Morrisons, then there may yet be an opportunity to catch this falling knife. But you need to bide your time.

Despite the falls, Morrisons is still not cheap

With the share price coming down so quickly, how can you have any sense of where it will bottom? Well, I always check the fundamentals. But these are the revised fundamentals, taking into account the profit falls and the reshaped retail landscape.

These tell me that Morrisons has a 2014 P/E ratio of 18, falling to 14 in 2015. What worries me is that, despite the share price falls, the business still doesn’t look cheap.

What has happened is that not only have Morrisons’ sales fallen, but so have their profit margins. This gives you some idea of the difficulties that the supermarkets are experiencing. There is now no doubt that this is an industry that is retrenching.

This is no longer a sector that you invest in if you are searching for growth prospects. But I view supermarkets such as Tesco and Morrisons as future turnaround prospects.

At some point Morrisons will turn around. At some point it will come through its travails and its profits, and its share price, will be resurgent. But at the moment the share price is still falling. I’m not buying yet.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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